Price controls are government impositions on the prices of goods or services. Price controls are generally intended to maintain the affordability of basic foods and goods and to prevent price gouging during shortages and insure income for providers of certain goods. The two primary types of price controls are a price ceiling (the maximum price that can be charged) and a price floor (the minimum price that can be charged).
This graph shows examples of price floors and ceilings. The solid green line is an example of a price ceiling (preventing prices from rising) and the dotted green line is an example of a price floor (preventing prices from falling).
Ceilings
This diagram represents a price ceiling, with P' representing the equilibrium price and P* representing the price ceiling., The key part of this graph is to notice the shortage created by the excess demand. Price ceilings are used to help consumers because prices are below equilibrium. http://economics.fundamentalfinance.com/price-ceiling.php
With a price ceiling, prices cannot go higher than P*. Since prices can't go higher than this, Demand is greater than supply, because the price is below equilibrium. Therefore Q demand > Q supply and there is a shortage
Floors
A price floor is a government control used to prevent market prices from dropping below a specified amount. A common price floor is minimum wage, which sets the bare minimum amount that a company can pay employees. A price floor will always result in a surplus of the good or product being controlled. Price floors are used to help suppliers because price is set above equilibrium.
The green dotted line in the above diagram represents a price floor, and the blue shaded area represents the surplus created by the price floor.
This video illustrates the concepts of price floors and ceilings with an extension to the effects of them, such as dead-weight losses.
Price Controls in the News
Due to the droughts incurred in Russia in late 2010, the supply of grain has fallen sharply as poor harvests occurred throughout the country. Since the supply dropped and demand didn’t shift, the equilibrium price shot upwards. Unfortunately, that meant that the equilibrium quantity dropped. Since grain is a key component of the Russian economy, local governments considered aiding consumers by imposing a price ceiling. This would place a maximum price on the price of grain products at the retail level as Deputy Industry and Trade Minister Stanislav Naumov pointed out. In turn, this would aid the consumer, but would detrimentally raise consumer surplus because of the artificial price drop created by the government. This worry was mirrored by President Dmitry Medvedev’s top economic adviser as he suggested that “‘It may lead to goods disappearing from the shelves.’” In the spirit of governmental price controls, the article continued to point out that it “may set price curbs for 24 [arbitrary] staple food items,” the effects of which may be positive or negative depending on which industries they affect.
Price Controls
Price controls are government impositions on the prices of goods or services. Price controls are generally intended to maintain the affordability of basic foods and goods and to prevent price gouging during shortages and insure income for providers of certain goods. The two primary types of price controls are a price ceiling (the maximum price that can be charged) and a price floor (the minimum price that can be charged).
Ceilings
This diagram represents a price ceiling, with P' representing the equilibrium price and P* representing the price ceiling., The key part of this graph is to notice the shortage created by the excess demand. Price ceilings are used to help consumers because prices are below equilibrium.
http://economics.fundamentalfinance.com/price-ceiling.php
With a price ceiling, prices cannot go higher than P*. Since prices can't go higher than this, Demand is greater than supply, because the price is below equilibrium. Therefore Q demand > Q supply and there is a shortage
Floors
A price floor is a government control used to prevent market prices from dropping below a specified amount. A common price floor is minimum wage, which sets the bare minimum amount that a company can pay employees. A price floor will always result in a surplus of the good or product being controlled. Price floors are used to help suppliers because price is set above equilibrium.
The green dotted line in the above diagram represents a price floor, and the blue shaded area represents the surplus created by the price floor.
This video illustrates the concepts of price floors and ceilings with an extension to the effects of them, such as dead-weight losses.
Price Controls in the News
Due to the droughts incurred in Russia in late 2010, the supply of grain has fallen sharply as poor harvests occurred throughout the country. Since the supply dropped and demand didn’t shift, the equilibrium price shot upwards. Unfortunately, that meant that the equilibrium quantity dropped. Since grain is a key component of the Russian economy, local governments considered aiding consumers by imposing a price ceiling. This would place a maximum price on the price of grain products at the retail level as Deputy Industry and Trade Minister Stanislav Naumov pointed out. In turn, this would aid the consumer, but would detrimentally raise consumer surplus because of the artificial price drop created by the government. This worry was mirrored by President Dmitry Medvedev’s top economic adviser as he suggested that “‘It may lead to goods disappearing from the shelves.’” In the spirit of governmental price controls, the article continued to point out that it “may set price curbs for 24 [arbitrary] staple food items,” the effects of which may be positive or negative depending on which industries they affect.
(http://www.bloomberg.com/news/2010-09-14/russia-may-set-price-ceiling-for-staple-foods-as-drought-fuels-inflation.html)